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AOL-Huffington Post Deal Eyed Closely By Silicon Valley

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The homepage of the Huffington Post is seen after the deal with AOL Inc. was announced. (CNET)

The homepage of the Huffington Post is seen after the deal with AOL Inc. was announced. (CNET)

LOS ANGELES (CBS / CNET / AP) — In a move that is being closely watched in Silicon Valley, Internet company AOL Inc. is buying the California-based news hub Huffington Post in a $315 million deal that represents a bold bet on the future of online news.

The AOL-Huffington Post combination rearranges the ad-revenue landscape, with Sunnyvale-based Yahoo Inc., Mountain View-based Google Inc. and, to an extent, Palo Alto-based Facebook as competitors, noted the popular technology blog site SiliconValley.com.

AOL, once the king of dial-up Internet access known for its ubiquitous CDs and “You’ve got mail” greeting in its inboxes, is in the midst of a turnaround effort as it tries to find ways to boost online ad sales to offset declines in the access business. The acquisition announced Monday is among the most aggressive strategic moves engineered by AOL CEO Tim Armstrong in an effort to reshape a fallen Internet icon.

Perhaps just as important as picking up a news site that ranks as one of the top 10 current events and global news sites, AOL will be adding Huffington Post co-founder and media star Arianna Huffington to its management team.

After the acquisition closes later this year, Huffington will run AOL’s growing array of content, which includes popular technology sites Engadget and TechCrunch, local news sites Patch.com and online mapping service Mapquest.

The price that AOL is paying is “really just the hiring fee to get Arianna,” said technology analyst Rob Enderle. “This is one of those out-of-left-field moves that actually makes a lot of sense. This could put AOL back on the map.”

Armstrong, a former Google executive, has been trying to turn AOL into a go-to place for a wide variety of news since he was hired to turn around the company in April 2009 while it was still a part of Time Warner Inc. The makeover is designed to give people a reason to visit AOL’s websites more frequently to help boost ad sales.

At the same time, Armstrong has laid off hundreds of employees to try to boost AOL’s financial performance and stock price. It has been a slog so far. AOL lost more than $780 million last year, largely because of accounting charges, and the company’s stock is now worth slightly less than after it was spun off from Time Warner Inc. 14 months ago.

The deal “will create a next-generation American media company with global reach that combines content, community, and social experiences for consumers,” Armstrong said in a statement announcing the deal.

Founded in 2005, Huffington Post is owned by Arianna Huffington, Kenneth Lerer and a group of other investors. The site attracts 25 million monthly visitors. AOL will pay $300 million of the purchase price in cash.

On a conference call with analysts, AOL Chief Financial Officer Arthur Minson said the company expects Huffington Post will generate $50 million in revenue this year, with a profit margin of 30 percent.

Minson said the deal will save AOL $20 million a year by allowing it to eliminate operations that overlap with Huffington Post.

Putting Arianna Huffington into a position of power could eventually threaten Armstrong’s job security if AOL still struggles, Enderle said.

“This is a gutsy move (on Armstrong’s) part because Arianna could end up running AOL,” Enderle said.

In a blog post about the deal, Arianna Huffington praised Armstrong’s vision for AOL and said they were on the same page as they discussed their ambitions for online news. “We were practically finishing each other’s sentences,” Huffington wrote about their discussions. She wrote that the deal was signed at the Super Bowl in Dallas, which she and Armstrong attended.

If it wins regulatory approval as expected, the deal would likely close in late March or early April.

Armstrong has been an aggressive deal maker since his arrival, but this marks by far the biggest acquisition of his tenure. Various published reports quoting unidentified people have also said he has talked to private equity firms about the possibility of trying to buy Yahoo, another struggling Internet pioneer that remains a household name. Yahoo CEO Carol Bartz, though, has shown little interest in working with AOL.

AOL had just a 5.3 percent share of the U.S. display advertising revenue in 2010, down from 6.8 percent in 2009, according to eMarketer. Facebook, meanwhile, accounted for 13.6 percent of display revenue last year, up from 7.3 percent in 2009.

The Huffington Post, though, enjoys a close relationship with Facebook — piloting some of the social-networking site’s news-sharing initiatives before they were available to other publishers.

The Huffington Post grew quickly from startup to online colossus. Over time, it launched city-specific pages and developed a roster of sections such as food and books. The work of its 70-person paid staff is augmented by content from news outlets and 6,000 bloggers who write for free.

(Copyright 2011 CBS Interactive and The Associated Press. All rights reserved.)

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